Home Prices May Have Bottomed Says New “Investor Sentiment Survey”

Dave:
Hey everyone. Welcome to On the Market. I am your host, Dave Meyer. And today, we are bringing back one of our most popular guests of all time, Rick Sharga, who is the founder and CEO, CJ Patrick Company. He was formerly the EVP of market intelligence at ATTOM.
If you’ve been listening to this show or you’re listening to the Bigger News section on the BiggerPockets Real Estate Show, you’ve probably heard Rick a few times because he is a incredible analyst and knows the housing market as good as truly anyone that I’ve ever met.
And as part of his new company, he and RCN Capital, you may remember the name of that company because we had their CEO, Tim Herriage on the other day, they produced a new survey that tracks the sentiment of real estate investors. And these are typically smaller real estate investors, retail investors like you and me. And I think it’s one of the first of its kind.
When I look at data, when I look at surveys, it’s usually for home buyers or it’s usually for real estate agents and there aren’t all that many data sources that focus specifically on the type of investors that we all are. And so when Rick and RCN Capital put this out and talked about how investors are feeling, what they’re doing in this type of market, we had to get Rick back on to talk about it. So we’re going to jump straight into our interview with Rick right after this break.
Rick Sharga, welcome back to On the Market. Thanks for being here.

Rick:
Always a pleasure to join you, Dave. Looking forward to another good conversation.

Dave:
I think having you three times makes you a regular. You’re officially one of our regulars now and I don’t think we have many, so thank you. We appreciate you always coming.

Rick:
I appreciate that opportunity to be one of your regulars. It’s quite an honor.

Dave:
I think the last time we had you on the show was about the beginning of the year, and just curious what you have been up to over the last six or seven months.

Rick:
Well, on a personal note, I’ve actually started my own company, CJ Patrick Company. I’m no longer with the data company I was with when we last spoke. And I’m providing market intelligence for companies in the real estate and mortgage business. Currently working with five different companies in different parts of the business.
And so that’s been keeping me pretty busy. It’s been a very hectic but ultimately fulfilling transition and I’m getting into areas of the market that I really hadn’t explored that deeply before. So that’s really been good. And of course, I’ve been keeping my eye on the housing and commercial real estate markets, which never cease to fascinate and amaze.

Dave:
Awesome. Well, first of all, congratulations on starting your new company. That’s a huge milestone and achievement. And would love to just jump right in. You said you have been doing a lot of research, looking into different areas of the market. What areas have been of particular interest to you recently?

Rick:
Well, I’ve been looking at the private lending industry and what’s going on with real estate investors, which I know is germane to what BiggerPockets does. And it’s been an interesting ride over the last year or so, as those investors have had to recalibrate to be able to accommodate much higher financing charges than they were looking at for the last couple of years.
And so, one of the trends that we’ve been watching pretty closely is how many investors have been shifting their strategy from fix and flip to buy and hold trying to take advantage of the rental market. And that’s particularly important because by different companies’ estimates, as many as 20 to 25% of the people who wanted to buy a house have voted themselves off the island for the time being. They can’t afford to buy that house because of higher mortgage rates and are now looking for a place to rent.
It just stands to reason that if you were looking to buy a house, you’d probably rather rent a house than an apartment if all else is equal. So that’s been one of the biggest trends we’ve been keeping an eye on over the last 12 months or so.

Dave:
I’m surprised to hear that because with high financing costs, it does feel at least that cashflow is more difficult to find. We have guests on the show all the time who are flipping or doing value-add projects and they seem to be doing pretty well right now. But then on the other hand, I saw this report from Redfin the other day that said that there’s these huge amounts of flippers who are losing money. So I’m just curious if you could shed some insight on that juxtaposition.

Rick:
Yeah, the people that are losing money aren’t anxious to go on your show and brag about it.

Dave:
Okay, those are the ones who keep declining us.

Rick:
Yeah. But, well, yeah, there’s some industry data that supports what you’re hearing in both directions really. On the fix and flip side, the company I used to work for, ATTOM Data, put out their Q1 results, so flipping through March, and there were about 70,000 flips across the country in March. That’s the lowest number we’ve seen in over two years, and it’s the fourth consecutive quarter where there were fewer flips than the quarter before. So that’s a pretty significant … And we’re talking about flipping activity that’s probably down by 40, 45,000 flips a quarter during that period of time.
The other thing that ATTOM’s been reporting on is that the gross margins for flipping have been coming down over those previous quarters. Now when I talk about gross margins, it’s what you paid for the property versus what you sold the property for. That doesn’t include your costs. So what were your repair costs? What were your labor costs, your insurance, your tax, your other holding costs? And most importantly, what were your financing costs for that period of time?
And I’ve talked to a number of seasoned, very sophisticated flippers over the past few months. Even some of the most sophisticated, most experienced flippers have lost money on individual deals because they just bought at the wrong time at the wrong price. And the prospective buyers of those flips now have a lower price threshold than what they had a year ago because their mortgage rates have doubled. So I think there’s a bit of a transitional period.
That said, this quarter was the first one in several quarters where we saw gross margins start to go up. That could be an indication along with home prices starting to go up a little bit as well that we might have bottomed out on the flipping market.
You raise a good point on the single family rental market in that if you just do the math today and you’re financing the purchase, it’s harder to make that cashflow work unless you’re really, really rigorous about the buy and making sure you’re paying the right amount of money for that. On the other hand, if you’re adding to an existing portfolio of rental properties that are already profitable, the likelihood is that mortgage rates, interest rates are going to go down over the next 18 to 24 months.
So if you can even break even on a new property right now, odds are you’ll be able to raise the rent over the next couple of years and probably refinance into a lower monthly payment. So it maybe is more of a future opportunity for some of these rental property owners than it is an immediate market profitability initiative.

Dave:
That’s a really good point that for newbies, if it’s your first rental, that’s probably not a desirable strategy to come out of pocket and use some of your income from your job to cover your investment. But if you’re earning a 6 or 7 or 8% cash on cash return, maybe better, across your portfolio, maybe you knock that down a percentage to banks a couple of deals. That’s a very good piece of advice there.

Rick:
And in some cases, you’re able to get a property below market that already has a tenant in place because there are other investors who are struggling a little bit, candidly. And I suspect we’re going to see a fairly significant number of failed Airbnb properties coming back to market from people who thought they were going to be real estate tycoons, but timed the market incorrectly when they tapped into their equity to buy that one short-term rental property that everybody else was buying.

Dave:
Well, I do want to get to that because that’s been a very frequent topic of conversation recently.

Rick:
I bet.

Dave:
But one of the main reasons we wanted to bring you in, aside from your excellent company of course, is that your new company created an investor sentiment survey, I think with a partner, RCN Capital. And I love this because it’s one thing to look at data, which you and I obviously do, that looks at holistically what’s going on with rent, what’s going on with home prices, but it’s not always easy to get data from the people who are on the ground actually buying and selling deals. So can you give us a high level summary of what you found?

Rick:
Yeah, and I don’t think any of it’ll be a huge shock to the folks tuning in today. Investor sentiment right now is that it’s a tougher market to invest in today than it was a year ago. That’s probably not a huge shock. Investors being optimists by nature, the majority of them think things will be getting better or at least no worse than they are today, over the next six months.
And that ties in pretty directly to what we’ve really seen as the impacts of higher financing costs driven by the actions of the Federal Reserve. And it’s also indicated by what they see as the biggest challenges to being a successful investor today. The number one most frequently cited challenge was the higher cost of financing today. The second one was the lack of inventory.
So again, the inventory issue is something we’ve probably talked about every time I’ve been on your podcast and it’s actually gotten worse rather than better and will probably continue to get worse, because 90% of mortgage holders today have a mortgage with an interest rate of 6% or lower, and 70% have a mortgage rate of 4% or lower.
And these folks just are not going to be motivated to put their properties on the market until interest rates come down pretty significantly. And that’s keeping the number of existing homes available for sale at historically low levels, which makes it tough not just for consumers, but also for investors looking to buy and either flip or rent out those properties.

Dave:
Great. I do want to get back to that question of inventory because I have a specific question for you, but before we do, when you talk about the survey and investor sentiment, people think it’s generally a worse environment than it was a year ago. What’s the scale there? Does that mean we’re going from, for every 100 investors that were optimistic last year, we’re going to 50 or how dramatic is the shift?

Rick:
It was a mixed bag. If you looked at worse or the same as it was a year ago, you were probably looking at close to 70% between those two categories and the balance said it was maybe marginally better or better. So it was more of a split with a little bit of an edge on the worse than it was a year ago.
We did see, if you’re looking out into the future, and this is interesting given what we were just talking about, flippers are much more optimistic going forward than the rental property owners. That could be the cashflow issue you talked about. I believe 38% of flippers expect the market to be better in six months and 19% expect it to be worse. On the other hand, only about 19% of rental property investors expect the market to be better, and about 31% expect it to be worse.
So the challenge here is that this is the first of these surveys that RCN Capital and my company have done together, so I don’t have a lot of historical data to compare this to. We’ll have more of that as we go forward in subsequent quarters.
But yeah, I mean some of the divergences between the type of investor and the size of investor were interesting. I mentioned that the two biggest challenges cited both now and six months from now are high cost of financing and limited inventory. But if you look at bigger investors, investors who buy more than 11 properties a year, they’re really concerned going forward about the difficulty they have in securing a loan-

Dave:
Interesting.

Rick:
… which wasn’t the case with your mom and pop investors. I don’t know why that is. It could be a sign that the regional banks, the community banks that those bigger investors work with have tightened up credit. But it’s interesting to just peel the onion a little bit and see what’s inside the different layers of the investor community.

Dave:
I’m looking at your survey, I just want to make clear to everyone that difficulty securing a loan is a different category than the high cost of financing.

Rick:
It absolutely is.

Dave:
And I think that’s a crucial distinction here that not only are investors struggling with the higher cost of financing, but even if the investor is willing to take on a 7 or 8% mortgage banks might not be willing to provide that loan.

Rick:
Yeah, and I think banks is the key word there. It’s interesting too, RCN Capital is clearly a private lender, but I’ve talked to CEOs from other private lending companies and anecdotally, if you’re an investor with a good track record, probably not that difficult for you to get a loan.
But if you haven’t done this before, unless you have everything lined up perfectly, it probably is a difficult time to get a loan just because of the risk factor involved. And that higher cost of financing actually makes the risk that much more of an issue from a lending perspective.

Dave:
That makes sense. Do you think the other divergence between flippers and rental properties is a proxy for home price outlook? Because I would imagine that some rental property investors are wishing prices would come down because it would reset that rent to price ratio that anyone looking for cashflow is hoping for, whereas flippers obviously benefit from a market that is appreciating.

Rick:
That could definitely be the case, although pretty much across the board there wasn’t a huge statistical difference here. Most of the investors expect nominal price gains over the next six months. Very, very few expect to see a price decline. And that was true whether they were flippers or they were rental property owners. And by the way, from all outward appearances, it looks like they might be right.
According to National Association of REALTORS, we’ve had four consecutive months of median prices falling for existing home sales and certainly new home sales prices are off year over year. But June, June looks like it might be an inflection point. And we saw June at least come up from May numbers, even though they were down slightly year over year. But last June was the high point in terms of median prices for a home ever, and we’re only off by 0.9% from that this June. So it does look like prices may have bottomed out and they’re on their way back up.

Dave:
That’s wild. Even as interest rates have gone up a little bit, at least if you looked at the three-month rolling average or anything. They’ve gone up a little bit into high 8, 7%. Yeah.

Rick:
Well, again, on the investor side, 8, 9, 10, 12. On the consumer side, they’re up, but they’ve been trading within a really narrow band for the last few months, somewhere between six and a half and 7%. If you do the math on a purchase, the difference in your monthly payment between six and a half and 7%, it’s nominal. So if you can afford to buy a property with a six and a half percent loan, you can probably afford to buy a property at seven unless you were really right on the margins.
I’m still of the school that believes that the Fed is probably done or almost done with its price hikes, its Fed Fund Rate hikes. And once that settles down, I do believe you’ll start to see mortgage rates come down for the balance of the year.
But the other thing that people viewing this or listening to this should keep in mind is that historically, every time we’ve had a reset, whether it’s home prices going up or down or its interest rates going up or down, there’s always a period of adjustment. And I think we’re seeing the adjustment taking place in the housing market today.
So we’re seeing buyers who had sticker shock six months ago when prices doubled, when mortgage rates doubled, resetting their expectations and maybe now bidding on a less expensive house with that higher mortgage rate.
And the other thing that’s happened is, candidly, even though prices are appearing to stabilize, the volume of sales is way off. I had forecasted at the beginning of the year we’d see 4.3, 4.4 million existing home sales. The June numbers from NAR came in at 4.28 million for the year. So we’re right there, but that’s down from 5.2 million last year and 6.2 million the year before. So that’s the trade-off is prices appear to be stabilizing, but the volume is way off.

Dave:
Just for context, Rick, what do you think a normal level of sales volume is?

Rick:
Normally for our population, we’d probably be a little over 5 million, somewhere between 5 and 6. That’s a great question, Dave. I think people have to keep in mind that 2021 was a bit of an aberration. We had one of the highest years of home sales ever, and 4 million is a little on low side. So again, given our demographics, we’d probably be somewhere between 5 and 6 million units sold in a year.

Dave:
Well, I was trying to save this question for later, but now we’re on a good time to ask this because we talked a little bit about this low inventory, how that’s clearly in some way contributing to the lack of sales volume as is higher interest rate, demand just left the market. We see fewer mortgage purchase applications, all sorts of indicators here.
To me, I just keep wondering how this fixes itself because if the main reason inventory is low is the lock-in effect and there’s a lot of reason to believe that it is, and I’ve not seen anyone forecast mortgage rates going back to three or four or even four and a half percent, how long could it possibly take for inventory to start approaching pre-pandemic levels if ever?

Rick:
A couple ways to answer that, Dave. It’s a really important question. The one scenario that I keep seeing people promote on YouTube, that makes me want to strangle them-

Dave:
Shadow inventory?

Rick:
We’re going to have a glut of homes … Yeah, okay … and in the meanwhile, the housing market’s going to crash and home values are going to lose 20, 30, 40% of value. And if anybody who’s watching this is tempted to sign up for those services, call Dave, call me, we’ll talk you off the ledge. It’s just there’s nothing in play, none of the dynamics in place that would support that. That would be one way of correcting the issue, but that’s not going to happen.
I think the most likely scenario is this plays out slowly over the next two to four years. And we saw a similar situation happen back in the ’80s where we had really, really boring home sales for a number of years as the market basically caught up with higher mortgage rates, higher home prices, and it just plays out over time. And the reason it plays out over time is because of inflation and because of wage growth. At some point the numbers aren’t quite as daunting.
And when we talk about this market and you look at affordability, which is really what drives a lot of this, there’s three legs to the stool. The one we’re all talking about right now is mortgage rates. And you really can’t overstate how big a role low mortgage rates played in the boom that we went through or how big a role doubling those rates had in the way volume has just dropped off a cliff. The second is home prices, and the third is wage growth.
Right now is the first time I remember in many years where wage growth is actually outpacing home prices. So home prices have been declining and are actually, if they’re rising now, they’re rising at a lower pace than wage growth.
So if mortgage rates came down even a little bit and home prices plateaued or started going up at 2, 3% a year and wages grew at 5% a year, over the next few years, affordability would feel a little better and you’d start to see more of these properties come to market and more buyers come to market.

Dave:
Do you have any concern though, if mortgage rates come down a little bit, then it’s just going to fuel more demand and not necessarily more supply?

Rick:
If mortgage rates come down just a little bit, say they go down to six, you probably will have more demand coming to market than supply, which will have the effect of raising prices and making affordability even more challenging. Now that in itself could get some people that are on the fence to list their properties because of the amount of equity they have, and-

Dave:
That’s true.

Rick:
… that might be a carrot that gets some people to move forward. I think once you get interest rates down to five and a half percent maybe or somewhere in those mid-fives, you have a lot of people who will then look at the market and say, “Okay, five and a half isn’t that far away from four as far as interest rates go. Maybe now would be a good time to sell my property because prices are high and I can tolerate that.”
But that delta between a two and a half percent mortgage and a 7% mortgage is just too big a financial hurdle and a psychological hurdle for most people to get by. And that was going to be the third scenario that is I do believe we have an unusually high spread between what mortgage rates could be and what they actually are.
For people that don’t know this, mortgage rates for a 30-year mortgage are typically based loosely on the yields on a 10-year US Treasury bond, and they’re usually about a point and a half to two points different. So if you looked at the yield on a treasury bond today, which is let’s say 3.8%, a normal mortgage would be no higher than 5.8%, might even be 5.3%. But because of risk and volatility due to what the Federal Reserve has been doing, there’s actually a three point difference. So today’s mortgage rates are over 6.8%, which is unusually high.
If the Fed settled down and we could just take the risk and volatility out of the market, we could see interest rates come down by a full point without anything else happening, and that would make a material difference in the market.

Dave:
I think those are all pretty realistic scenarios. It’s very hard to predict. Do you think there’s one in particular you think is more likely than the others?

Rick:
If I had to bet money on it, I would say we’re in for two to four years of pretty unexciting home sales-

Dave:
Volume?

Rick:
… volume, while things normalize. And that’s unfortunate timing because we have the largest cohort of young adults between the ages of 25 and 34 in US history, and that’s prime age for household formation. And if they can’t find something they can afford to buy, they’ll look for something to rent.
So I do think there’ll be opportunities for investors. I think investors are going to have to remain flexible about their approach, whether they’re rental property investors or fix and flip investors or wholesalers that are accommodating either of those types of investors.
But if I had to bet on most likely scenario, it would be that mortgage rates come down gradually, prices do not come down gradually, they keep going up at maybe a slower rate, and wage growth continues to be healthy except if we have a recession when they’re likely to come down a little bit and then rebound. And that’s a combination of things that tends to lead to a pretty slow sales volume housing market for a few years.

Dave:
So I want to get back to the survey that you did. Obviously we’re talking in broad national level trends right now, but I’m curious if you saw any regional statewide discrepancies in sentiment in your survey?

Rick:
We didn’t really cross-reference individual state issues with the sentiment because there weren’t enough participants in any given state to really have a statistically significant number.
What I did notice, if you look at where they’re investing today versus where they’re planning to invest, we did see a little bit of a decline in states like California, like Arizona, so some of the Western and Northwestern states. A little bit less activity in Florida, which was a little bit of a surprise to me. And some of the Mid-Atlantic and Midwest states saw a little bit of an increase in planned activity.
So I don’t know the reason for it, but one of the states that popped for six months from now was Virginia. So I guess investors maybe know something that the rest of us don’t about the housing market there.

Dave:
I guess my theory is always that the more affordable markets right now are going to be the more popular ones, but I think Virginia on state level is still relatively expensive compared to a lot of other parts of the country.

Rick:
It’s right about middle of the pack in terms of expense levels. On the northern part of the state, you have your proximity to D.C., which does tend to inflate home prices a little bit in Northern Virginia. Parts in the south really aren’t that expensive at all, and certainly parts in the west of the state.
One of the things that might be happening also, Dave, is that investors might be following some of the migration patterns we’re seeing from a population standpoint. We saw huge swings into, initially, states like Utah and Arizona and Idaho, the Carolinas, Texas, Florida, when COVID hit and people were able to work from home and were looking for more affordable markets to buy properties in. And that inflated home prices in some of those markets to where we’re seeing a resetting now in states like Arizona and Idaho, which probably had price increases that outpaced market realities.
But we are seeing population growth and job growth continue in some of those Southeastern and Midwestern states, even states like Texas in the South. Just about every market in Texas is showing growth except for Austin right now, both in job growth and price growth. And again, Austin was one of those high-flyers during the big days of the pandemic.
So it could be that if I’m an investor, if I can track where population is growing and where jobs are growing, those are two indicators that you probably have a housing market that’s growing as well, both for sales and for rentals. And it might be that investors are paying attention to those trends.

Dave:
I would think so. I mean, we talk about it enough on the show, so maybe. I would love to think that we’re moving markets here, but I don’t think that we’re exactly at that scale yet. But I mean it makes sense. If you’re looking for high probability rent and price appreciation places to follow, pop migration and household growth, those are things that drive demand.

Rick:
And the inverse of that is true, too. California lost a net of 300,000 people last year, and the government used to pooh-pooh that by saying, “Oh, it’s all retirees.” And now what we’re seeing is young college graduates also leaving the state. I have an adult son living at home. He and his soon-to-be fiance who’s a lawyer, are talking about what state they may need to move to in order to ever own a house.

Dave:
It’s crazy.

Rick:
So I do think there’s some of that going on. And you look at prices in Coastal California, the Pacific Northwest, parts of Arizona, they’re down 10% year over year. So if you’re an investor, do you want to bet that you’re coming at the bottom of the market in California and still paying $830,000 for a house, or would you rather take some of that cash and move it to a market that looks more poised for growth?

Dave:
That definitely makes sense. You’re in California?

Rick:
I’m in Southern California, Orange County.

Dave:
Okay. Well, probably still a nice place to live.

Rick:
It’s a wonderful place to live for a lot of reasons, but candidly, my wife and I are talking about where we might move when I retire. So it’s a very real-world scenario for a lot of Californians.

Dave:
So congratulations on the survey. This is awesome. I love seeing this. Is the plan to do this periodically so you can track sentiment over time?

Rick:
Yeah. We’ll be fielding our next survey in August, pushing out the results in September. We want to have this out there available quarterly. We surveyed over 300 investors for this one. I’m hopeful that we’ll get more interest as we go forward from people that want to participate in this and share their views. And so yeah, it’s going to be a quarterly event.

Dave:
Great. Well, let me know when you do. We’d love to take a look at the results and have you back to discuss them because I think this is really helpful to our particular audience. As we said at the top of the show, there’s tons of information about home buyers. And those trends are somewhat helpful, but really understanding the niche of what all of our colleagues and peers as small real estate investors are doing is super helpful.

Rick:
Yeah, we thought that was missing from the market and that’s why RCN and my company decided that it was time to initiate something like this.

Dave:
All right, great. Well, Rick, thank you so much for joining us. We really appreciate you every time we come here On the Market. If people want to learn more about the survey or your new company, where should they do that?

Rick:
You can always find me on Twitter or X or whatever it’s called these days. My handle is just Rick Sharga. You can reach out to me on LinkedIn. The report’s available on the RCN Capital website. That’s just rcncapital.com. And you can find more information about my company at cjpatrick.com.

Dave:
Awesome. And I did, actually, that was one question I wanted to ask you because you were one of the original people I started following on Twitter. I was very late to Twitter, and I was wondering, are you on threads now? Are you threading?

Rick:
I’m not threading yet. I’m waiting to see how that actually shakes out. And I’m also waiting to see what Mastermind Musk does with Twitter, if he winds up blowing that up. But-

Dave:
Yeah, you got to call it X now, as of a few days ago.

Rick:
Right now my social channels are Twitter, LinkedIn. And I’m still on Facebook and that’s a mix of personal and professional.

Dave:
Rick, thanks again for joining us. We appreciate you being here.

Rick:
Thanks for having me.

Dave:
Thanks so much to Rick again for joining us for this episode of On The Market. We always appreciate it when he’s here. It was great. I really like having these repeat guests on because it’s really interesting to see how their thoughts evolve over time. I’m curious if you like having these repeat guests on and who your favorite guests are.
If you want to give us that feedback, you can do that in a couple of different places. You can either do it on YouTube, you can leave us a positive review and tell us who your favorite guests are, or you can always hit me up on Instagram where I’m @thedatadeli. We’d love to hear which type of guests you favor and which ones you would like us to bring back on future episodes. Thanks again, everyone, for listening. We’ll see you for the next episode of On The Market.
On the Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team.
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